The G7 Summit Highlights Western Leaders' Hypocrisy

Game Over

This game is now over. But we need to be wary of the consequences.

The United States may win and get the other countries to limit their protectionism. On the one hand, it exports very little, only 12 percent of GDP. On the other hand, everyone wants to sell there because of market size and growth opportunities. Additionally, without their huge trade surplus, the European Union and China cannot sustain their growth.

And the debt? China owns $1.3 trillion of United States debt. It does not reach 6.2% of the total. It is neither the largest holder of U.S. debt nor a threat. As shown throughout 2018, the demand for US bonds is much higher than the supply on all issuances and the U.S. based bond funds would absorb any sale by the Chinese in a few days.

Also, China cannot sell them. For China, these bonds are reserves of foreign currency. If sold, the Yuan would suffer enormous volatility, especially when its currency is used in less than 4% of global transactions and its value is more than questioned because of tight capital controls. In addition, China needs several trillion of dollar liquidity to run its trading machine.

It has been very easy for the European Union and China to support their GDP growth thanks to an external sector and a trade surplus that hid trade huge barriers under the rug of regulation and subsidies.

From bureaucratic barriers, hidden taxes, lack of intellectual property protection, disproportionate subsidies to obsolete sectors, or invented environmental excuses, it is over. If they want to sell to the United States, they have to adopt measures that increase free trade, not disguise protectionism under a mask of openness.

However, the United States should be careful either way. Tariffs are the worst way to combat protectionism. They give other governments the excuse to impose higher barriers to trade and blame the external enemy, without getting rid of the existing barriers.

Lose Lose

However, if Trump’s tactics don’t work and other countries liberalize their trade, we are looking at a world with much slower than anticipated GDP growth.

Europe is already slowing down and it looks like it will get worse not better. The data on industrial production, GDP, consumption and credit point to a much poorer growth than estimated. The European Union is exiting its monetary stimulus with a very important drop of the economic surprise indicators.

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